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USD: Dollar staying bid into the FOMC
Even though US rates are not moving much this week, it feels like the FX market is taking the possibility of a Fed hike tomorrow more seriously. The chances of that hike are now priced at nearly 40%. There are lots of credible opinions out there in favour of a hike, citing the benefits of an early Fed move to boost the Fed\u2019s inflation-fighting credentials and ultimately lessen the need for subsequent tightening. The Fed\u2019s lack of communication has certainly created fertile ground for such speculation \u2013 a theme we referenced in this month\u2019s FX Talking: Dancing in the dark.<\/p>\n
On the US calendar today are the weekly ADP job numbers, the advanced trade balance for June and consumer confidence for July. After a low initial jobless claims last week, the market is probably most interested in today\u2019s ADP data, where any uptick in this series could prove a mild dollar positive.<\/p>\n
Overall, we doubt investors will want to let go of dollar balances ahead of tomorrow\u2019s Fed meeting. They will, however, be keeping their eyes on lower oil prices and also the sell-off in chip stocks as both Chinese competition in chip production and the circular nature of US hyper-scaler megadeals come under scrutiny.<\/p>\n
DXY can remain bid near 101.50, with an outside risk of pushing up to June\u2019s 101.80 high.
Chris Turner<\/p>\n
EUR: Swamped by the Fed story
While this week\u2019s lower energy prices will be a boon to Europe, EUR\/USD is failing to find any benefit. That\u2019s because the Fed story is dominating. It is hard to see that dynamic switching this week, where a break of 1.1360 support opens up a retest of the 1.1325 low.<\/p>\n
On the euro crosses, we see EUR\/GBP holding gains near 0.8550. We published an article last week explaining why we think EUR\/GBP will be heading up to 0.88 later this year. And this week\u2019s Bank of England meeting could serve as a reminder that the bar is high for a rate hike \u2013 something which could weigh on sterling.
Chris Turner<\/p>\n
CHF: Unusual source story emerges
Yesterday afternoon, Bloomberg ran a source story that insiders at the Swiss National Bank felt the SNB would keep the policy rate unchanged at 0.00% until the end of 2027. Forward guidance, like this, has become exceptionally unfashionable in central banking circles this summer. Additionally, we very rarely receive source stories like this from the SNB. The opposite is true of the European Central Bank, where post-meeting source reports are now commonplace.<\/p>\n
The SNB has yet to comment on this report, which may very well be true. Certainly, at ING, we forecast the SNB on hold throughout 2027 and have seen that as a factor which drives Swiss franc underperformance when global interest rates rise on higher oil prices \u2013 this as interest rate differentials widen against the franc.<\/p>\n
The story will also point carry trade investors to increasingly fund out of Swiss francs rather than the yen. Funding out of Swiss francs is cheaper and also avoids the risk of the Bank of Japan intervening to the tune of $70bn, which could trigger a quick 3-4% drawdown for yen-funded carry trades. We have also been saying this for a while, but we think Switzerland\u2019s low rate environment has made USD\/CHF a very popular vehicle to express hawkish Fed views. Were the Fed to blow the doors off with a hike tomorrow, USD\/CHF could be looking at 0.85 in August.
Chris Turner<\/p>\n
CEE: Rates normalise, FX still has room to catch up
The region saw a sharp recovery in rates yesterday, although this did not fully carry through to FX. Implied rate paths moved meaningfully, now pricing around 60bp of tightening in the Czech Republic and 40bp in Poland, alongside 50bp of easing in Hungary over an 18-month horizon. In the past two sessions alone, curves have shifted by roughly 15-30bp across the region. We still see material mispricing versus our forecasts, but market pricing is moving back into a plausible scenario range. We expect this normalisation to continue this week unless the US-Iran conflict re-escalates and oil prices rise further.<\/p>\n
As discussed yesterday here, rates and FX have diverged sharply over the past two weeks. The rates rally and the reduced rate-hike premium are not supportive for FX, but given the current gaps and the recent lag in FX versus rates, we still see room for selected currencies to strengthen. We therefore continue to expect gains in the zloty and forint despite narrower rate differentials, with EUR\/PLN moving below 4.300 and EUR\/HUF below 358. By contrast, EUR\/CZK does not benefit from the same dynamic and has closely tracked rates; we instead see scope for a move above 24.200. We also expect more dovish Czech National Bank comments this week, which could further support EUR\/CZK upside.
Frantisek Taborsky
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